The U.S. Commodity Futures Trading Commission is poised to deny requests from Wall Street firms for a broad delay of rules requiring they move their swaps transactions onto government-mandated systems by Oct. 2.
Lobbyists representing market participants have asked the CFTC to delay when they must start trading on swap execution facilities, or SEFs, rather than privately in over-the-counter markets, according to letters sent to the regulator. The International Swaps & Derivatives Association and the Securities Industry & Financial Markets Association are among groups that say their members need more time to prepare for the transition.
“I don’t see a wholesale delay of Oct. 2,” Steve Adamske, a CFTC spokesman, said in a Sept. 24 telephone interview. Instead, the regulator will review requests for delays case by case, he said. “We will take a look at anybody who is looking for no-action relief on a targeted basis.”
Sifma wants the deadline extended until April, according to a letter sent from the group’s Asset Management Group.
“As the potential SEFs themselves are not clear about how to interpret certain of their obligations under the SEF final rules, our members are unable to determine how to implement the transition to swap execution on SEFs,” the group, whose members oversee about $20 trillion in assets, said in a Sept. 23 letter to the CFTC. “We firmly believe that without sufficient time and guidance necessary to address key implementation challenges and interpretive questions, an orderly transition will not be possible.”
The Dodd-Frank Act of 2010 has provisions designed to move swaps, which helped fuel the 2008 credit crisis, from largely unregulated trading negotiated off exchanges to more transparent systems including SEFs, which the CFTC and U.S. Securities and Exchange Commission oversee. The CFTC completed rules governing the transactions in May, opening up competition in a market with $633 trillion of over-the-counter derivatives contracts outstanding.
A broad delay of the Oct. 2 deadline is unlikely and firms that want more time to prepare will have to request that individually, CFTC Chairman Gary Gensler said this month at an ISDA conference in London, according to Risk magazine.
Today, CFTC Commissioner Scott O’Malia said during a speech in Geneva that the deadline should be postponed for everyone. Oct. 2 is too soon and market liquidity may be harmed, particularly on platforms outside the U.S., he said.
“Market participants would benefit from getting a time-limited extension to allow for a smooth transition to these new execution venues,” O’Malia said in the speech.
The Wholesale Market Brokers’ Association Americas said legal, technological and logistical issues warrant a delay.
Without a delay, “instead of the usual bustle of trading activity, there is a risk that market activity migrates to unregistered (or non-independent) trading systems or to facilities located outside of the United States,” the group wrote in its letter to the CFTC.
The lobbyists represent the world’s largest banks such as JPMorgan Chase & Co. and Deutsche Bank AG, asset managers such as Bank of New York Mellon Corp. and brokers that arrange over-the-counter trades between dealers such as ICAP Plc and GFI Group Inc., according to the groups’ websites.
Banks have traditionally reaped wide profit margins from negotiating swaps transactions, and the industry has fought the shift to SEFs. The definition of swap-execution facility went through at least five changes when the legislation was negotiated in Congress and was the focus of intense lobbying once the CFTC was authorized to write the specifics of how SEFs would operate.
Greenwich Associates, a consulting firm, said the move to SEFs will reduce trading costs and make buying and selling the swaps easier for bank clients such as asset managers and hedge funds, according to a Sept. 18 report.
“They will benefit from tighter spreads and access to more liquidity providers than were available to them in the OTC market,” Kevin McPartland, head of market structure research at the consultant, said in the report.
The CFTC has approved temporary applications to create 13 SEFs, from companies including Bloomberg News parent Bloomberg LP, IntercontinentalExchange Inc. and MarketAxess Holdings Inc., according to the regulator’s website. All of them have different rulebooks that potential customers need additional time to assess, the WMBAA said in its letter.
“Although WMBAA member firms have begun this process in good faith, due to the time-intensive nature of on-boarding, it is highly unlikely that all of the WMBAA member firms’ customers will complete the entire process by Oct. 2,” it said.